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Corporate Finance > Ch 7&8 > Flashcards

Ch 7&8 Flashcards

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1
Q

The amount of safety stock that a firm carries depends upon

A

the predictability of inventory usage and the time period necessary to fill inventory orders.

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2
Q

Variables important to credit scoring models include

A

All options are true:

  1. age of company in years.
  2. negative public records.
  3. facility ownership.
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3
Q

The economic order quantity

A

assumes that delivery times of each order are consistent.

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4
Q

The corporate sweep account is an account

A

that allows companies to maintain zero balances in their checking accounts, with their excess cash moved into an interest-earning account and lets companies write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest-bearing account to the appropriate payment account.

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5
Q

Which of the following is the most liquid asset?

A

• Cash equivalents

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6
Q

If XYZ Suppliers is at EQ and the cost of ordering is $40, the total inventory cost is twice the ordering cost.

A

• True
The carrying cost is the same as the cost of ordering at EOQ. So, mathematically, the Total inventory cost is twice the cost of ordering or twice the ordering cost if it is given, or the total cost of inventory utilizing the EOQ concept is the sum of the cost of ordering and the carrying cost.

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7
Q

There are 7 regional collection centers?

A

False

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8
Q

An accounts receivable policy should always conduct an analysis of a customer’s creditworthiness.

A

True

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9
Q

As sales expand so will accounts receivable.

A

True

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10
Q

ordered > EOQ —carrying cost increases & ordering cost decreases

Is the information true?

A

Yes, true

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11
Q

Commercial bank term loans

A

are offered to superior credit applicants

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12
Q

Friedman Roses Incorporated needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?

A

$81,250
funds needed = loan amount / (1 - C%) = 65000 /(1- 2) = $81,250

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13
Q

Compensating balances

A

are used by banks as a substitute for charging service fees.

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14
Q

Hedging refers to

A

a transaction that reduces risk exposure.

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15
Q

Firms exposed to the risk of interest rate changes may reduce that risk by

A

hedging in the financial futures market.

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16
Q

2/10 Net 30 on $100 billing means we could pay $98 up to the 10th day or $100 at the end of 30 days

A

True

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17
Q

You are quoted a 6% annualized interest rate on a $100,000 loan for 90 days (1.5% for the 90 days) with a 20% compensating balance. What amount of the loan will you be able to use?

A

$80K
Loan Amount - Compensating % Amount
100K - (2 * 100K) = $80K

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18
Q

Commercial paper is a Short-term (less than 270 days) secured note sold to a lender or on the open market.

A

False
CP is a Short-term (less than 270 days) unsecured note sold to a lender or on the open market

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19
Q

When a compensating balance is required the effective interest rate remains the same.

A

False

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20
Q

Assume you need to walk out the door with $1 with a 20% compensating balance requirement this means you need to ask to borrow $1.20.

A

False
$1/(1-.2)=$1.25

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21
Q

Spontaneous credit shrinks as sales expand and grow as sales decline

A

False

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22
Q

Trade credit from suppliers is normally the most available form of short term-financing

A

True

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23
Q

Bank loans are usually short term and should be paid off from funds from the normal operations of the firm

A

True

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24
Q

Trade credit was the largest provider of short term financing

A

False

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25
Q

Spontaneous credit grows with ___ and contracts during ____

A

Business (sales) expansion, declines

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26
Q

Accounts payable are a

A

Spontaneous source of funds, growing as the business expands

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27
Q

Banks prefer self liquidating loans

A

True

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28
Q

Prime rate

A

The rate that a bank charges to the most creditworthy customers

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29
Q

Prime rate premiums are added based on credit risk

A

True

30
Q

Rate can fall below published rates due to competition or economic conditions

A

True

31
Q

Significance of prime rate;

A

Benchmark for other interest rates
Indicators of monetary policy
Impacts consumer spending and business investment
Influences corporate profits

32
Q

Nvm

A

Nvm

33
Q

What is meant by Net Credit Position?

A

A/R - A/P

34
Q

Rate for US dollar borrowing in London market

A

LIBOR

35
Q

Significant international Benchmark interest rate

A

LIBOR
Was lower regulation in London market
Scandal involving rate manipulation
Replaced by SONIA

36
Q

Sterling Overnight index average SONIA

A

Replaced LIBOR

37
Q

What’s positive when AR are greater than AP and negative when the opposite is true?

A

Net credit trade

38
Q

Who tend to be net providers of trade credit (relatively high receivables)

A

Larger firms

39
Q

Who typically is in user position

A

Smaller firms (relatively high payables)

40
Q

Refers to minimum cash balances that a bank requires a borrower to maintain as part of a loan agreement

A

Compensating balances

41
Q

When interest rates are lower,

A

Compensating balance rises

42
Q

What should be the managers primary concern in managing cash and marketable securities

A

Liquidity and safety

43
Q

Which of the following is generally considered the least liquid of current assets

A

Inventory

44
Q

Characteristics of a money market deposit account include

A

All of the options are true.
A lower risk than money market funds,
insurance by federal agencies, generally a limit of three deposits or withdrawals per month.

45
Q

Generally, the safest and most marketable instrument for a short term investment is

A

Treasury bills

46
Q

The three primary policy variables to consider when extending credit include the following except

A

The level of inflation

47
Q

We expect that we can receive annual incremental income after taxes of $25,000 including an adjustment for uncollectible accounts. What is the maximum commitment to A/R that we should be willing to assume if our firms a minimum required after tax return is 8%?

A

$312,500

48
Q

Dun & Bradstreet is known for providing

A

Credit scoring reports that rank a companies payment habits relative to its peer group

49
Q

Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in account receivable. Waldron has a turnover ratio of six to one between sales and accounts receivable what is Waldron Inc. expected return on investment?

A

30%

50
Q

Cost savings from Just in time inventory management include

A

All of the options are true
Greater productivity, lower inventory financing costs, reduced overhead expenses

51
Q

Warren enterprises expects 30,000 unit sales, has ordering cost of $22 per order, carrying cost of $1.50 per unit and desires to keep 125 units in safety stock. Assuming level production what should its average inventory be?

A

594

52
Q

Use of the economic order quantity

A

Provides the lowest overall inventory costs

53
Q

Which of the following is the most liquid asset?

A

Cash equivalents

54
Q

What is generally the largest source of short term credit for small firms?

A

Trade credit

55
Q

A large manufacturing firm has been selling on a 310 net 30 basis. The firm changes its credit terms to 220 net 90. What change might be expected on the firms balance sheets?

A

Increased receivables

56
Q

If analog computers can borrow 8% annually for three years what is the effective interest rate on $1 million loan where a 15% compensating balance is required

A

9.41%

57
Q

Mr. Jones borrows $4500 for 90 days and pay $75 interest. What is his approximate effective rate of interest?

A

6.7%

58
Q

Von Hayek kayaks can borrow $12,500 for 60 days at a cost of $220 interest. What is the effective rate of interest?

A

10.6%

59
Q

LIBOR is

A

An interest rate paid on euro dollar loans in the London market

60
Q

Which of the following is not a characteristic of commercial paper?

A

It has a one to two year maturity

61
Q

Commercial paper that is sold without the use of an actual paper certificate is known as

A

Book entry paper

62
Q

Accounts receivable may be used as a source of financing by

A

All of the answers are correct factoring the receivables to a finance company
pledging the receivables as collateral,
selling securities back by the receivables

63
Q

Which method of controlling pledged inventory provides the greatest degree of security to the lender

A

Warehousing

64
Q

Which of the following is non-a method for controlling pledged inventory

A

All items are true
floor planning, blanket, inventory liens, and public warehousing

65
Q

Hedging refers to

A

A transaction that reduces risk exposure

66
Q

The financial futures market

A

Allows for the delivery of financial instruments at a future point in time

67
Q

Two types of production

A

Seasonal, level

68
Q

Benefit of inventory management?

A

Saves money

69
Q

Which of the following is not a benefit of commercial paper to a corporation

A

It is less risky

70
Q

Which method of controlling pledge inventory provides the greatest degree of security to the lender

A

Warehousing

Corporate Finance (5 decks)

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